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Energy & Natural Resources - United Kingdom

On May 10 2011 the Energy Bill 2010-11 received its second reading in the House of Commons. The bill mainly provides for the implementation of the government's Green Deal initiative, which aims to encourage the installation of energy efficiency measures in homes and businesses. However, it also seeks to improve the regime for third-party access to upstream oil and gas infrastructure in order to maximise recovery from the United Kingdom's declining North Sea reserves. The bill is expected to receive royal assent in July 2011.

Existing legislation

The legislation on third-party access to upstream oil and gas infrastructure is contained in the Pipelines Act 1962, the Gas Act 1995, the Petroleum Act 1998 and the Energy Act 2008. Provisions in each act set out the process for resolving disputes about third-party access to, and compulsory modifications of, new and existing upstream oil and gas infrastructure. However, the legislation includes notable gaps and inconsistencies. For example, the acts differ on:

the procedure for applying to the secretary of state;

the requirements that the secretary of state may impose on infrastructure owners; and

the factors that the secretary of state must take into account when considering an application for third-party access.

In each case the applicable provisions vary according to the type of infrastructure to which the application relates. Moreover, the secretary of state has no power to:

require modifications to oil or gas processing facilities in order to give effect to an application for a third-party access right; or

intervene in disputes over third-party access unless the third party makes a formal application seeking access to the relevant infrastructure.

Proposed changes

The bill aims to streamline and re-enact the existing legislation, replacing the existing provisions with one set of requirements relating to third-party access, which would apply equally to all upstream oil and gas pipelines and processing facilities.

Dispute resolution procedure

The new legislation envisages a broadly similar dispute resolution procedure. Where a party that seeks access to upstream oil and gas infrastructure cannot agree rights of access with the owner, it may apply to the secretary of state for a notice granting the relevant rights. The secretary of state may consider such an application only if he or she believes that the parties have had reasonable time in which to reach an agreement, and that the granting of such rights will not prejudice:

the transportation or processing of quantities of petroleum which the infrastructure owner may reasonably be expected to require; or

the rights of other third parties with respect to such infrastructure.

If the secretary of state decides to accept the application and issues a third-party access notice, such notice may contain such provisions as the secretary of state considers necessary to secure the right of access and necessary ancillary rights, including the charges that may be made for the exercise of such rights.

The bill allows the secretary of state to require that the rights secured by the notice be assignable by the applicant. This will avoid the need for further negotiation with the infrastructure owner in the event that the applicant disposes of its interest in the asset to which the access right relates.

An application to the secretary of state should be considered a last resort. The oil and gas industry has developed a voluntary code of practice on access to upstream oil and gas infrastructure on the UK continental shelf. The code sets out the principles and procedures to be followed in negotiating third-party access to oil and gas infrastructure, and obliges parties to comply with the more general obligations under the oil and gas industry's commercial code of practice. Although both codes are voluntary and non-statutory, the Department of Energy and Climate Change encourages all parties to follow them.

Key changes

The most significant proposed change would empower the secretary of state to issue a third-party access notice to upstream oil and gas infrastructure owners on his or her own initiative. However, such an intervention would be permitted only if the secretary of state were satisfied that the parties had had sufficient time in which to reach agreement and there was no realistic prospect of an agreement being reached. In connection with this power, the secretary of state would have the right to require the provision of specified information where he or she had reason to believe that a person had either made or received an application for third-party access.

The bill also proposes a new process for the variation of a third-party access notice, either by agreement between the parties or by order of the secretary of state (on application by the owner of the relevant infrastructure). This would remove the need to restart the dispute resolution procedure in order to vary such a notice, as is required under existing legislation.

The bill would create a new offence of giving false information to the secretary of state in connection with an application for third-party access. This offence would be punishable by a fine of up to £5,000 and would also apply to corporate entities.

Comment

Although the proposed right of the secretary of state to issue third-party access notices on his or her own initiative and the new offence of giving false information should incentivise parties to negotiate third-party access rights in a positive and timely manner, it remains unclear whether the changes will significantly affect the negotiation of infrastructure access rights. Since 1975, when the secretary of state's power to issue third-party access notices was introduced, only one formal application has been made.

Given that parties which seek access to infrastructure are clearly reluctant to involve the secretary of state, it is unclear how the secretary of state will become aware of disputes about third-party access rights, especially if parties could find themselves liable to a fine in respect of information provided to the secretary of state.

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